CAS_Hybrid practice exam #10 (Spring 2019 exam8 q9)

twittetwitte
in Practice Exam 1
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Question is whether to implement. Read the examiners report and the 10 answers there - and here's what I don't get.

The "standard LR" includes the Xmod - correct (so sample 10 is wrong). Then if you think about the magnitude of the xmod that is baked into the standard LR - then you manual loss ratios taht are completely upside down, right. If it takes a .4 mod to get to a standard LR factor of .8, then then manual Loss ratio is a 2. So rather than saying that the plan "undercorrects" for risk differences - which would generally be true with upward sloping std loss ratio - you have to conclude that this plan just fails at identifying riks differences and gives giant credits to terrible performing risks. ...



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Comments

  • adminadmin

    Let's focus on the fundamentals here and bring together an answer which comes from several of the CAS samples.

    Standard loss ratio = loss / standard premium

    Standard premium = manual premium * experience mod

    Manual loss ratio = loss / manual premium

    So Standard loss ratio = loss / (manual premium * experience mod) = (loss / manual premium) * (1/experience mod) = manual loss ratio / experience mod.

    This rearranges to manual loss ratio = standard loss ratio * experience mod.

    This means the table in sample 10 is correct. The takeaways from the table are:

    1. The manual loss ratios slope upward with good dispersion so the class plan identifies differences between risks well, and
    2. The standard loss ratios have less dispersion than the manual loss ratios which means the experience rating is doing at least something to correct for the differences between risks.

    Since the current model doesn't have experience rating the second point above means we should recommend implementing the proposed model.

    We're not huge fans of the CAS releasing so many different versions of a solution but do want our students to know there are many ways to get full credit. Please let us know if you think it would be helpful for us to release a comprehensive but condensed single solution (along the lines of the above) as a companion to the CAS solutions in situations like these.

  • twittetwitte

    Thanks. I agree that having more concise answers - not 10 would be helpful.

    Also missed that example 10 was dealing with LR - so whereas I was thinking Std. Prem = Xmod * ManPremium, the relationship is inverted when dealing with Loss ratios.... thanks for doing the algebra, i feel in computer world I'm not as good about writing out the algebra steps.

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